Bank incentives or regional needs? Determinants of public credit guarantee use for startups

This study examines the determinants of public credit guarantee use for startups in Japan using bank-region-level panel data from FY2018 to FY2024. Although credit guarantees are designed to alleviate startups’ credit constraints arising from information asymmetry, banks may also use them to manage balance sheet risk. This study investigates whether bank incentives or regional needs are the primary determinants of startup credit guarantee use, an issue that has received limited attention in the existing literature. We estimate the model using high-dimensional fixed effects, including bank, region, bank×year, and region×year fixed effects. The results show that guaranteed lending is weakly related to regional economic conditions but strongly associated with bank-level characteristics such as profitability and asset quality. Furthermore, greater use of startup credit guarantees is associated with higher subsequent default rates. Overall, the findings suggest that bank incentives play a more important role than regional needs in shaping the allocation of startup credit guarantees.